Weaker Dollar, Higher US Interest Rates, a Dilemma for a Central Bank With No Quorum

Who needs an MPC after 19 months of status quo? The MPC is like the boy
who cried ‘Wolf!’, till he lost credibility in the sight of his neighbours. Who
will come to its aid now?

Nigeria
has stayed without an active Monetary Policy Committee (MPC) so far in 2018. A
political stalemate between the Executive and National Assembly has caused a delay
in the latter’s confirmation of Buhari’s nominees. In such a situation, the
central bank ought to establish a quorum, which is a temporary board containing
at least 6 members. However, the apex bank has not been able to do so as only
four out of 12 members are still seating.The
absence of an acting MPC has raised concerns over the effects of a pause in
economic and monetary policy making. This is especially worrying given the
recent developments in the US money and forex market.The US dollar has lost 12% in value
since November 2017, falling to the lowest level since 2014. Additionally, the
Federal Reserve, led by Jerome Powell, has signaled a continuation in its
contractionary policy. Analysts predict at least three hikes this year,
bringing the Fed rate to 2.00-2.25% by December from the current 1.25%-1.5%.
91-day T-bill rates have also in-creased by 0.22% YTD, and are expected to
continue on this upward trend. These have been driven by heightened worries
over runaway inflation, prompting investors to sell dollars and US T bills.Additionally, comments from the
Treasury Secretary indicated that the US could adopt a devaluation to support
its trade balance.

These developments have implications
for Nigeria, as they increase the competitiveness for the US market. First,
weaker dollar will make US goods cheaper, and could lead to an increase in
demand for US exports. Higher interest rates are also positive for hot money
traders, who might find the US money less risky, and more attractive for
investments. These could lead to capital flight, which will put pressure on the
external reserves and exchange rate.The response of the CBN in such
moments would be a tightening of monetary policy rates, to keep domestic yields
high and attractive. However, given the lack of a quorum, or confirmation of
new members, the CBN is unable to response with the required policy.What are the alternatives?Without a quorum, the CBN’s hands may
be tied with respect to traditional monetary policy measures. However there are
still options open to the CBN, one of which is forward guidance. Forward
guidance is the term used by central banks to communicate their future monetary
policy decisions. It is used mostly to instill calm in the wake of market
uncertainty. The Central Bank of Nigeria has come forward to say it will adopt
this unconventional method of implementing monetary policy, which is not
uncommon. Global monetary authorities that have used this concept in the past
to implement policy decisions include the Federal Open Market Committee of the
US (2013).In the same year, the Bank of England
and the European Central Bank also adopted the use of forward guidance to
address monetary policy decisions. The CBN’s decision to proceed with forward
guidance in a period of no MPC quorum will help ensure confidence in the policy
decision process of the Central Bank. It also provides a clear communication of
future decisions that will be taken and hence the markets, investors are duly
informed. It portrays the fact that there is still some guidance in place even
if there is no committee.Related News